1. Field of the Invention
The present invention relates to the field of structured financial products. More particularly, the present invention relates to a method and system for offering mandatorily convertible securities, such as Dividend Enhanced Common Stock (DECS), with associated forward purchase contracts and call options.
2. Background
As known in the art, structured financial products are financial instruments that are designed and created by investment institutions for business entities (e.g., corporations) to issue and sell to investors for specific capital-raising activities. In turn, investors purchase structured financial products, focusing on payoff patterns (i.e., capital appreciation and/or current income) of the products, to address their specific investment objectives. As referred herein, an investor can be an individual, a group of individuals, an organization, or a business entity.
One of the many structured financial products in existence today is the conventional DECS. As understood in the art, a DECS is typically a preferred security, issued by a business entity paying a cash distribution, with a mandatory conversion into shares of common stock at a specified future time and based on a specified conversion price. DECS are typically structured to have a face amount equal to the price of the common stock at the time of issuance. The DECS conversion feature typically works as follows: 1) if the common stock price on the mandatory conversion date is at or below the common stock price on the issuance date, each DECS will convert into a fixed number of common stock equal to:Face amount of DECS/Common Stock Price on Issuance Date;2) if the common stock price on the mandatory conversion date is above the common stock price on the issuance date but below the conversion price, each DECS will convert into a variable number of common stock equal to:Face amount of DECS/Common Stock Price on Mandatory Conversion Date;or 3) if the common stock price on the mandatory conversion date is at or above the conversion price, each DECS will convert into a fixed number of common stock equal to:Face amount of DECS/Conversion Price.
A variation of the DECS is the Upper DECS, which differs from the DECS structure in that Upper DECS achieves the conversion-like feature by combining two securities into a single investment unit:                i. a fixed income instrument, such as a senior note or a trust preferred security, having a certain maturity date (e.g., a seven-year fixed income instrument) and a coupon (i.e., enhanced dividend); and        ii. a forward purchase contract that obligates the investor to purchase a certain number of common-stock shares (e.g., a three-year purchase contract) based on a purchase schedule similar to the conversion schedule laid out above for the DECS product.        
Hence, when an investor pays $100 to purchase an Upper DECS, the investor is purchasing two instruments: a $100 fixed income instrument and the forward purchase contract. The fixed income instrument is pledged as collateral for the investor's future obligation to purchase the common stock under the forward purchase contract. At year 3 the first investor is required to satisfy the contract by purchasing the contracted number of common stock shares. The obligation may be satisfied in one of two ways:                i. on or prior to the remarketing date, strip the fixed income instrument from the unit and deliver sufficient US government Treasuries to satisfy its obligation under the forward purchase contract; or        ii. submit the fixed income instrument to the remarketing agent in year 3 for remarketing to a second investor. The proceeds from the remarketing will be used for the purpose of purchasing the common stock from the issuer by the first investor.        
Because the fixed income instrument has a five-year maturity date, it will remain outstanding for another two years. At year 5 the issuer will redeem the fixed income instrument from the second investors (or those first investors who elected to strip the fixed income instrument from the unit) for $100.